Certain bar disciplinary fees can be discharged by bankrupt attorneys

The California Supreme Court issued an order this week clarifying that certain fees incurred by an attorney facing State Bar discipline can be discharged in bankruptcy, allowing the lawyer to be reinstated despite not paying the debt.

This order, issued at the request of the bar, could presumably apply to any mandatory payment conditions that result from the disciplinary proceedings against suspended attorney Thomas V. Girardi.

However, because Girardi is under a conservatorship, the bar cannot prosecute him at this time, said Beverly Hills attorney Ronald Richards, who is special counsel in Girardi's bankruptcy proceedings.

Wednesday's order does affect lawyers who contest State Bar charges and who also face bankruptcy, Richards said in an interview Thursday.

"If they were forced to file bankruptcy, and were able to discharge their State Bar costs, they would be able to get a fresh start, which would include not having to pay the State Bar for their investigation and prosecution costs," Richards said. "The Supreme Court took the charitable view. If that lawyer was actually forced to file a Chapter 7 bankruptcy and earned discharge, then these fees should not survive the bankruptcy."

Earlier this month, the bar asked the Supreme Court to issue a standing order authorizing it to:

" (1) not consider discipline conditions containing dischargeable payment obligations for purposes of determining whether the attorney should remain ineligible to practice law when an attorney files for bankruptcy; (2) to reinstate the discipline condition if the debtor fails to receive a discharge or the discharged condition becomes non-dischargeable; and (3) to consider discipline conditions that contain payment obligations satisfied after the attorney receives a bankruptcy discharge."

In granting the petition, the Supreme Court clarified a relatively niche situation potentially brought to light due to recent cases involving attorneys facing bar discipline and bankruptcy.

Before Wednesday's order, the question remained as to whether bar fees incurred during the investigation and prosecution of an attorney were dischargeable by a bankruptcy court or if they should be treated like a contempt of court fine or other punitive fines which cannot be forgiven in bankruptcy, Richards said.

The bar said it sought the order due to a case involving Lenore Albert, an attorney who was suspended in 2018. The bar previously unilaterally reinstated Albert to active status to avoid violating federal bankruptcy law when the only condition remaining of Albert's suspension was payment of discharged debt. In re: Lenore Albert Sheridan (Bankr. C.D. Cal. 2018).

"As federal bankruptcy law preempts this court's discipline orders, the State Bar was forced to take this unilateral action to avoid contempt sanctions for violating the United States Bankruptcy Code," the bar's petition said. "The State Bar requests this standing order specifically to avoid these situations in the future."

Bankruptcy attorney David M. Goodrich said the order seemed to provide a way for the bar to avoid having to collect certain debt, which could be welcome news for an attorney facing Chapter 7 bankruptcy.

"I don't know if that helps you get reinstated as an attorney but a lot of times Chapter 7 debtors are in a lot of debt and clearing the debt, even if it means the State Bar obligation remains, is not a bad thing," Goodrich said. "Now they're only focused on one, maybe two debts, and that makes life a lot easier when you're going from $100,000 in unsecured debt to $14,000."